Dollar hits two-month low versus yen in Tokyo

The dollar fell to a two-month low against the yen and hovered near a record low against the euro on Tuesday as worries about US subprime mortgage woes hurting the credit market and the US economy still weighed.
Traders said market sentiment remained bearish for the dollar, and players were awaiting US economic data later in the week for clues on whether the problems in the housing sector were spreading to broader economic activity.
Concerns about a credit market crunch and wider fallout from the subprime mortgage troubles prompted some investors to unwind yen carry trades, in which the low-yielding yen is sold to invest in higher-yielding currencies and assets, traders said.
"The dollar selling is driven by subprime mortgage concerns while the yen's rise is due to some unwinding of carry trades," said Shogo Nagaya, a forex manager at Nomura Securities. "But the basic trend of investors favouring high-yielding currencies and those with clear prospects of rising interest rates remains intact," Nagaya said.
Earlier in the session, sterling rose to a fresh 26-year high against the dollar while the Australian dollar hit an 18-year peak and the New Zealand dollar scaled its strongest level since it was floated in 1985.
The dollar fell 0.37 percent to 120.57 yen just off a two-month low of 120.41 yen hit on electronic trading platform EBS earlier on Tuesday, the lowest since mid-May. The euro inched up to $1.3816 from around $1.3810 in late US trading on Monday, and hovered near a record high of $1.3846 struck on EBS on Monday.
The dollar's slide against the yen also spurred selling of the euro against the yen, with the euro trading down 0.35 percent at 166.58 yen Sentiment remained solid for such high-yielding currencies as the New Zealand and Australian dollars. The New Zealand dollar hit a 22-year post-float high of $0.8110 well-supported by expectations for the Reserve Bank of New Zealand to lift its cash rate to 8.25 percent on Thursday.
The Australian dollar rose 0.1 percent to $0.8845, holding near an 18-year peak of $0.8863 hit on Tuesday, as investors awaited a key domestic second-quarter consumer prices index due on Wednesday. The Australian dollar struggled against the Japanese currency, falling 0.22 percent to 106.69 yen.
Sterling extended gains to a 26-year high of $2.0647 supported by expectations the Bank of England will lift rates to 6.0 percent by the year-end from 5.75 percent now.